Investing styles

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
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ghariton
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Investing styles

Post by ghariton » 14 Feb 2014 14:24

Morgan Housel:
One of the biggest ironies in investing is that while almost everyone thinks they are a contrarian, almost no one actually is. I remember 2007, right before the market peaked. Just about everybody I knew thought they were a value investor, zigging where others zagged. But at investing conferences, you found out that all these guys were basically buying the same stocks. What people thought was a contrarian view was actually rampant groupthink. It felt great when you, the "contrarian," had your views confirmed by another "contrarian." But contrarianism isn't supposed to feel good, and you're not supposed to have it confirmed by others. That's why so few can actually do it. It's rare -- not impossible, but rare -- that someone can remain blissfully content when everyone else around them thinks they're crazy. One of the nastiest tricks our minds play is convincing nearly all of us that we can be that person.
What we need are automatic mechanisms to ensure we are contrarian, without thinking about it,

For example, how about investing in a portfolio of U.S. stocks, chosen by first eliminating all members of the S & P 500, then picking a random sample of what's left?

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Re: Investing styles

Post by OhGreatGuru » 14 Feb 2014 14:52

You could call it:
a) the Anti-Index Index Fund;
b) the S&P Losers' Index Fund;or
c) the Long Shot Index Fund; or,
d) the Faint Hope Index Fund.
(I lay claim to the naming royalties)
Last edited by OhGreatGuru on 14 Feb 2014 14:56, edited 1 time in total.

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Re: Investing styles

Post by NormR » 14 Feb 2014 14:52

ghariton wrote:For example, how about investing in a portfolio of U.S. stocks, chosen by first eliminating all members of the S & P 500, then picking a random sample of what's left?
Don't you run the risk of being a conformist thinker with regards to the advantage of small cap stocks?

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Re: Investing styles

Post by Insomniac » 14 Feb 2014 14:59

How about an ETF made up of the fastest shrinking ETFs?

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Re: Investing styles

Post by Shakespeare » 14 Feb 2014 16:35

“A wise man should be prepared to abandon his baggage at any time.” -- R.A. Heinlein, The Door Into Summer.

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Re: Investing styles

Post by ghariton » 14 Feb 2014 18:05

NormR wrote:
ghariton wrote:For example, how about investing in a portfolio of U.S. stocks, chosen by first eliminating all members of the S & P 500, then picking a random sample of what's left?
Don't you run the risk of being a conformist thinker with regards to the advantage of small cap stocks?
No, I would include random picks from large, medium, and small cap stocks.

Or, if you want to make things more interesting, pick randomly from just the list of large-cap stocks that are not in the S & P 500.

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Re: Investing styles

Post by parvus » 14 Feb 2014 20:42

Define large-cap then. I think the S&P 500 covers about 80% of the market cap of U.S. stocks.
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Re: Investing styles

Post by ghariton » 14 Feb 2014 21:22

parvus wrote:Define large-cap then. I think the S&P 500 covers about 80% of the market cap of U.S. stocks.
Large cap is above $4.0 billion and traded on an American exchange or OTC.

S & P 500 has eight criteria a publicly traded company must satisfy before making it into the club. Presumably, if market cap were the only criterion, there would be no need for the other seven. It then follows that there must be U.S. companies, traded on public exchanges, that are not in the S & P 500. I'm just too lazy to hunt for them.

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Re: Investing styles

Post by Shakespeare » 14 Feb 2014 21:40

I'm just too lazy to hunt for them.
Use your chimp. :wink:
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Re: Investing styles

Post by parvus » 14 Feb 2014 22:21

Shakespeare wrote:
I'm just too lazy to hunt for them.
Use your chimp. :wink:
Or the Siegel grip: look for companies recently demoted from the S&P 500 (except for Consolidated Lint and Amalgamated Dust). So the S&P 400 might be a start.

But George, you've clearly identified the weakness with pure index investing: there are factors beyond simple market cap in play, and thus, indexes are actively managed.

What you're betting is that no one can beat the index bureaucrats, which is sort of hard to do, since they define the market relevant universe.

Your contention is that in aggregate, all investors receive the market return. But which market are we talking about? What is investable and what is not? What is representative and what is not? What has adequate liquidity and what does not? Why does four consecutive quarters of positive earnings matter?

And, given that you include what is traded on American markets, why not ADRs? On the other hand, since Apple mostly avoids plans its taxes by domiciling operations offshore, why should it be treated as an American company?
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Re: Investing styles

Post by ghariton » 15 Feb 2014 00:20

parvus wrote:But George, you've clearly identified the weakness with pure index investing: there are factors beyond simple market cap in play, and thus, indexes are actively managed.
Yup.

As far as I can see, the main other factor used by S & P is liquidity: float, corporate form, etc, etc.

But we've known that for a long time. Indeed, private equity -- perhaps the least liquid form of investment by our pension plans -- is considered a separate asset category, quite different from public equity. Companies omitted by S & P mostly fall somewhere along the spectrum between General Electric and Dick's Sporting Goods.
Your contention is that in aggregate, all investors receive the market return. But which market are we talking about?
A very good question.

My view is that there is not just one market, but rather multiple markets: publicly traded equities, private equity, REITs, preferred, bonds and other forms of fixed income, commodities, art and other collectibles, etc. Each investor defines his or her reference market as a combination of these. How widely should I go? The trade-off is the following: A wider definition of market means more diversification. But to get there I have to go into investments that are less liquid and with higher transaction costs (think of the bid-ask spread on paintings).

So when I write about "indexing" and beating (or not) the index, I'm really talking about just one asset category, i.e. equities that are publicly traded on organized (more or less) exchanges. Personally, I adopt the definition used by VT:
The investment seeks to track the performance of a benchmark index that measures the investment return of stocks of companies located in developed and emerging markets around the world. The fund employs an indexing investment approach designed to track the performance of the FTSE Global All Cap Index, a free-float-adjusted, market-capitalization-weighted index designed to measure the market performance of large-, mid-, and small-capitalization stocks of companies located around the world.

Clearly more diversification would be desirable. But I'm a very small individual investor, and my investment amounts cannot justify the expense of, say doing due diligence on private equity. Only the big boys can do that effectively.

Active management may or may not do better by diversifying more widely. Recent experience of hedge funds suggests otherwise, but that's an empirical question, and the answer may change going forward. However, if active management limits itself to the asset category "publicly traded equity", it is simple arithmetic that active management as a whole cannot have resu8lts much different from the index (before expenses).

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Re: Investing styles

Post by Mike Schimek » 15 Feb 2014 17:53

What we need are automatic mechanisms to ensure we are contrarian, without thinking about it,
I'd perceive contrarion picks as stocks that are not liked by most. Therefore finding a stock that has a consensus sell, and or high short interest, would be contrarion, as most people are believing it will decline and positioned accordingly.

Contrarion pretty much means going against the crowd. A couple weeks ago gold bulls were at a low and gold bears were at a high % wise according to a yahoo article I read. The contrarion move at that point would seem to be to go long gold.
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Re: Investing styles

Post by Springbok » 15 Feb 2014 20:00

Mike Schimek wrote: The contrarion move at that point would seem to be to go long gold.
Maybe buying Transalta at $13.50 a month or two ago. Buying an unloved stock and breaking the FWF rule of not chasing yield. Worked so far!

Hope you are right about gold!

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Re: Investing styles

Post by ghariton » 05 Mar 2014 23:54

Cliff Asness and John Liew discuss the efficient market hypothesis, value investing, and momentum investing.

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Re: Investing styles

Post by ghariton » 11 Mar 2014 21:01

FT Alphaville, quoting J P Morgan:
For investors with constraints on style exposure or who otherwise need to choose stocks within the growth universe, paying up for growth appears to be the appropriate strategy – at least in the near term. During growth rallies since 2012, choosing stocks in growth based on high forecasted long term growth, high trailing sales growth, high R&D to sales and high headcount growth have been effective; using valuation as a selection tool has not worked. We have found that in periods of rising stock specific risk (we remain in such an environment, despite a decline in February), factor momentum strategies work, while betting on factors to reverse is imprudent. Thus, it is likely that the recent factor efficacy pattern continues. It may be difficult for fundamental investors and quantitative processes to discount valuation as a criterion for stock selection, and our alpha models – particularly MOST, which uses valuation factors in intra-style stock selection – have struggled recently, but this is what the market is suggesting, at least within growth.
Time to switch from a value style to a growth style?

(I'm of the school which holds that switching styles gets investors into trouble. It's a form of chasing the latest fads, and that leads to buying high and selling low. Still, YMMV.)

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Re: Investing styles

Post by ghariton » 21 Mar 2014 16:38

Arvind Hoffman and Hersh Shefrin. From the abstract:
We find that individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors. The data on which this claim is based consists of transaction records and matched survey responses of a sample of Dutch discount brokerage clients for the period 2000-2006. Overall, our results indicate that individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, are less inclined to bet on reversals, choose risk exposures featuring a higher ratio of nonsystematic risk to total risk, engage in more options trading, and earn lower returns.
Note that this result, that technical analysis underperforms, is for individual investors, not institutional investors. Here is a study suggesting that technical analysis may work for institutional investors. From the abstract:
This study takes a novel approach to testing the efficacy of technical analysis. Rather than testing specific trading rules as is typically done in the literature, we rely on institutional portfolio managers’ statements about whether and how intensely they use technical analysis, irrespective of the form in which they implement it. In our sample of more than 10,000 portfolios, about one-third of actively managed equity and balanced funds use technical analysis. We compare the investment performance of funds that use technical analysis versus those that do not using five metrics. Mean and median (3 and 4-factor) alpha values are generally slightly higher for a cross section of funds using technical analysis, but performance volatility is also higher. Benchmark-adjusted returns are also higher, particularly when market prices are declining. The most remarkable finding is that portfolios with greater reliance on technical analysis have elevated skewness and kurtosis levels relative to portfolios that do not use technical analysis. Funds using technical analysis appear to have provided a meaningful advantage to their investors, albeit in an unexpected way.
In other words, technical analysis does deliver higher alpha for institutional investors, but at the cost of higher volatility, higher skewness and higher kurtosis (fatter tails).

I wouldn't try this at home

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Re: Investing styles

Post by ghariton » 26 Mar 2014 18:48

John Authers in the Financial Times points out that there are in fact two very different interpretations of value investing:
Value investing has been popular ever since it was promulgated by US academic Benjamin Graham in the 1930s. His idea was that many companies had grown so cheap in the wake of the Great Crash and the subsequent economic depression that it was possible to buy them for less than their intrinsic value.

It received a separate and very different impetus in the 1970s, when a vast research project by two more academics, Eugene Fama and Kenneth French, showed that over time, cheap stocks – which they measured by price-to-book ratio – did indeed outperform. They labelled this the “value” effect.

These approaches are different. But there is also an academic debate over how to explain the Fama and French findings which leads, in turn, to two different kinds of “value” investing. Mr Fama himself, who was made a Nobel economics laureate last year, explains the value premium in terms of risk. Cheap stocks are generally cheap because they are in bad shape and face big risks. Therefore a value effect over time is just what would be expected in an efficient market – higher risk is related to higher long-term returns.

A second explanation comes from behavioural finance, and suggests that markets are inefficient. As humans we get excited about stocks with a great story to tell, and tend to ignore the more humdrum boring stocks that plug away producing predictable profits and dividends. Buying such stocks is a way of taking advantage of inefficiency and in the long run it will pay off. Both approaches are about “value”, but they are different.
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Re: Investing styles

Post by parvus » 26 Mar 2014 23:22

Ah, the wallflower explanation.
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Re: Investing styles

Post by parvus » 27 Mar 2014 21:43

Here's a behavioural anomaly some might want to chew on. In another thread, Brian 5000 expressed worry not about his percentage holdings, but the dollar size of one of his holdings.

I wonder how pervasive this is. For example, I was recently rebalancing. I have two choices: board lots and dollar amounts.

With board lots, I prefer to buy one or two at a time, if I can afford it. With dollar amounts, I tend to buy $5,000 at a time.

I prefer to think in discrete increments. Is this behavioural prejudice -- something like mental accounting -- part of why market anomalies exist?

It's a rule I'm comfortable with, but it violates the precepts of market-cap weighting.
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Re: Investing styles

Post by AltaRed » 27 Mar 2014 22:17

I don't know that it matters at the margin, i.e. whether I buy 200 or 1000 shares is irrelevant IF I want to buy in the neighbourhood of, for example, $20k. IOW, I will round off to the appropriate board lot that is closest to $20k (even if that would ulatimately be $18k or $22k). My rationale is that my $20k today will most likely not be $20k at the end of the next market day anyway.

If, however, you are saying you would balk at buying 1000 shares of $5 stock simply because it is 1000 shares.... then I don't get that.
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Re: Investing styles

Post by parvus » 27 Mar 2014 23:18

I'm not sure I would make an initial investment of 50k in any one stock -- but only given the size of my current portfolio, which is bigger than a bread box, but less than the size of a modest pension plan.

Obviously, positions are scalable depending on the size of the portfolio.

But to take an example from a discussion tonight, I'm interested in Fairfax, but it's trading at ~480. To buy a board lot would be $48,000. Too big for my portfolio.

On the other hand, I could comfortably buy any of the banks -- were I to have conviction -- $5,000 to $10,000 at a time.

So part of this is about (un)reasonable diversification -- 20 holdings -- and part is simply portfolio capacity to make trades.

So I go to default, $5,000 or a board lot. I'm not terribly worried about the pennies that pile up on the table uninvested -- sooner or later they will be deployed into another opportunity.

What I think about, instead, is whether a specific investment will make a meaningful boost to the portfolio. Were I to plug it into a portfolio optimizer, it might indeed. But portfolio optimizers, in my view, are little better than intuition or gut feeling.

I'm generally happy with the positions I hold -- and I hold them for five to 10 years, (with some trimming around the margins, naturally, after a really bad year). It's mostly funds and ETFs, some individual stock exposures.

I'm experienced with my long-term holdings, and we've gone through good and bad. With new positions, I want to take a cautious stance, even though, compared to most on this board, I think I have an aggressive investing personality, and will bet on a takeover, for instance.

Of course, this is simply grist for the mill of efficient market technicians. I will have an alter (ego) out there who is the counterparty on my trades, with a different risk appetite and a different view on stocks and the markets.

What it comes down to is a constrained portfolio. I won't move $50,000 at a time, though the risk-reward prospects might warrant it. I can and will move about half that. But that's a behavioural anomaly, isn't?
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Re: Investing styles

Post by AltaRed » 28 Mar 2014 00:06

Well yes, I would not pony up for a board lot of $500 stock either, at least not in one tranche. But that is a function of one's portfolio size. All I am really saying is that I prefer to buy in board lots if the dollar size of investment I want to make allows me to do so.

If i am taking a bit of a flyer on a stock, I will buy a half position to mitigate my risk, but in most cases, I will buy a full position in one tranche. After all, if I am in it for the long term, it should not matter very much if my purchase price is off a bit.
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Re: Investing styles

Post by BRIAN5000 » 28 Mar 2014 12:00

It's a rule I'm comfortable with, but it violates the precepts of market-cap weighting.
How does sizing the amount of initial or subsequent investing amounts violate precepts of market-cap weighting?
So I go to default, $5,000 or a board lot.
IMHO if this is your comfort level then why would it be wrong?

Looks like AltaRed may be comfortable making about $20,000 initial purchases good for him. Some people on here are comfortable taking $40,000 positions in a single volatile stock does that mean you and I are wrong only wanting to commit $5000 at a time. I certainly don't think so.

AltaRed also thinks owning more stocks is more work. It may be for him but for some it actually means less work because your portfolio is more diversified and index like no need to watch so closely. As an example I don't need to worry about which of the big 6 banks will do best I own them all.
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Re: Investing styles

Post by AltaRed » 28 Mar 2014 12:59

BRIAN5000 wrote:Looks like AltaRed may be comfortable making about $20,000 initial purchases good for him. Some people on here are comfortable taking $40,000 positions in a single volatile stock does that mean you and I are wrong only wanting to commit $5000 at a time. I certainly don't think so.
I think you misunderstood that conversation. I was trying to understand from Parvus what he was uncomfortable with. He said:
With board lots, I prefer to buy one or two at a time, if I can afford it. With dollar amounts, I tend to buy $5,000 at a time.
I used an example of whether Parvus was uncomfortable with the concept of buying 1000 shares, because of the number of shares (i.e was more than one or two board lots), even if they were only $5 each. With his clarification, I came to understand and agree that, like him, I would not be comfortable purchasing a board lot of $500 shares, i.e. $50k. I then used an example that IF I was wanting to buy in the $20k range of where I am comfortable buying, my purchasee would not be fixed at the preciseness of $20k, but more appropriately board lots that would approximate a purchase of $20k.

It matters not to me how much of anything someone buys. It does interest me whether the preference is for board lots, or a precise amount of cash.
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Re: Investing styles

Post by BRIAN5000 » 28 Mar 2014 13:45

My best guess is that it represents about 0.1% of Brian's portfolio. I fail to understand how the decision to sell such a small piece has any meaning.
Well my IPS says I can only sell 1/2 to 1% (based on equity) of any equity position at anytime up to twice a month. Different rules for different experience levels. These rules are meant to keep me out of making any big mistakes. I think about selling 50-200 shares when I'm over a core position. I try to sell when stocks are banging on their 52 w highs. I know the Price of everything and the value of nothing.

So I add from 50 -200 shares when I think they're cheap. If its a core stock and it hasn't reached 3% they go in non-registered, or my wifes non-registered account depending on what stock it is. If I already have core weightings they go into my RRSP or maybe the wifes non-registered. So for example I try to decide what's happening in the market and if Telus drops to about $32.10 I will try to figure out if I should buy a few hundred shares and figure out a sell point ($37.25) at the moment. If I hold for one year thats about 19% two years 8.5% good enough for me.

What does your IPS say about trading sizes and position sizes?
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